2
Disclaimer My views and notions of relevant law are being presented not those of McCarthy Fingar LLP My views and notions of relevant law are being presented not those of McCarthy Fingar LLP This presentation is for informational purposes only and is not intended as tax or legal advice This presentation is for informational purposes only and is not intended as tax or legal advice Always seek counsel for any specific tax or legal situation. Always seek counsel for any specific tax or legal situation.

4
What is a Non-US Resident Income Tax Income Tax Individual Individual Not a US Citizen Not a US Citizen Not a US Permanent Resident (No “Green” Card”) Not a US Permanent Resident (No “Green” Card”) Not present in the for “too long” - 183 day weighted counting test over 3 year lookback period triggered by current year presence of over 31 days. Not present in the for “too long” - 183 day weighted counting test over 3 year lookback period triggered by current year presence of over 31 days. Entity – Not chartered in the US (50 states, federal, and territories and possessions) Entity – Not chartered in the US (50 states, federal, and territories and possessions) Transfer Tax (Estate and Gift) Transfer Tax (Estate and Gift) Individual – domicile test – home is where the heart is Individual – domicile test – home is where the heart is Entities – N/A Entities – N/A

5
One Size Does Not Fit All Since every transaction is different, no single solution fits every case Since every transaction is different, no single solution fits every case Structure appropriate for a non USA resident family with an aging patriarch who wants to invest $95 million dollars in active rental and developmental properties vacant land is probably unacceptable for the 35 year old son of the family who wants to buy a Manhattan condo to live in while on assignment in the US for five years Structure appropriate for a non USA resident family with an aging patriarch who wants to invest $95 million dollars in active rental and developmental properties vacant land is probably unacceptable for the 35 year old son of the family who wants to buy a Manhattan condo to live in while on assignment in the US for five years We’ll discuss that more when I get to the case study. We’ll discuss that more when I get to the case study.

6
Effect of The Fiscal Cliff The classic US tax trade off was/is using corporate holding structures to avoid estate tax (35% top rates) at the expense of higher income (35% top rates for corporate vs. 15% for capital gains for individuals) The classic US tax trade off was/is using corporate holding structures to avoid estate tax (35% top rates) at the expense of higher income (35% top rates for corporate vs. 15% for capital gains for individuals) This equation may change to tilt the preference to corporate structures in 2013 with estate taxes slated to go up to 55% top rates, corporate rates perhaps to come down (e.g. to maybe 25- 28%) and capital gains rates to go up to 20%. This equation may change to tilt the preference to corporate structures in 2013 with estate taxes slated to go up to 55% top rates, corporate rates perhaps to come down (e.g. to maybe 25- 28%) and capital gains rates to go up to 20%.

7
A Note on LLC’s These are very “hot” in the US These are very “hot” in the US However, they don’t tend to mix too well with tax treaties However, they don’t tend to mix too well with tax treaties Hence, generally to be avoided in the context of holding structures for foreigners investing in US real estate Hence, generally to be avoided in the context of holding structures for foreigners investing in US real estate

8
Non-US Effects Must Always be Taken into Account US Real Estate investments for foreigners cannot be handled in a US vacuum US Real Estate investments for foreigners cannot be handled in a US vacuum It is essential to work with local tax advisers in the home country to make sure that minimizing US tax does not have an untoward consequence in the home country that may more than offset the “savings” in the US. It is essential to work with local tax advisers in the home country to make sure that minimizing US tax does not have an untoward consequence in the home country that may more than offset the “savings” in the US.

9
Don’t Forget Transaction Costs In the US lawyers (who can be pricey) not notaries handle the legal end of real estate – On the other hand a lot of US real estate lawyers are looking for work so it is a “buyer’s market” for the clients!! In the US lawyers (who can be pricey) not notaries handle the legal end of real estate – On the other hand a lot of US real estate lawyers are looking for work so it is a “buyer’s market” for the clients!! State and local government non-income tax expenses can be very high – More on this in a bit State and local government non-income tax expenses can be very high – More on this in a bit

10
A Word on FIRPTA This is a big exception to the rule that non_US residents are not generally subject to US income tax on capital gains from US Sources This is a big exception to the rule that non_US residents are not generally subject to US income tax on capital gains from US Sources FIRPTA treats all sales by non-US residents as subject to mandatory 10% withholding on the gross proceeds of the sale FIRPTA treats all sales by non-US residents as subject to mandatory 10% withholding on the gross proceeds of the sale However, this is not the actual tax which is only on the gain so a refund can and should be applied for where applicable. However, this is not the actual tax which is only on the gain so a refund can and should be applied for where applicable. The tax is imposed at the applicable graduated US rates The tax is imposed at the applicable graduated US rates So a US return must be filed in addition to just having the withholding done. So a US return must be filed in addition to just having the withholding done.

11
Case Study – The Schiller Group A wealthy Central Eurozone family. A wealthy Central Eurozone family. So let's hedge $95 MM of their € with a US real estate portfolio which they will be 50-50 partners with a US realty group based in NYC. So let's hedge $95 MM of their € with a US real estate portfolio which they will be 50-50 partners with a US realty group based in NYC. Also let's give them a 35 year old single son who is going to live in the US for a couple of years to get the US biz going soundly. Also let's give them a 35 year old single son who is going to live in the US for a couple of years to get the US biz going soundly. Naturally we want him to live in a condo on Park Avenue which he or the family will own at a purchase price of $5 MM. Naturally we want him to live in a condo on Park Avenue which he or the family will own at a purchase price of $5 MM. We’ll start with the commercial holdings. We’ll start with the commercial holdings.

12
The Commercial Portfolio We are going to have our Schiller Group invest in active real estate ownership of income producing and property development (e.g. improvements and construction) We are going to have our Schiller Group invest in active real estate ownership of income producing and property development (e.g. improvements and construction) The general rule is to set up a separate holding company for each piece of property The general rule is to set up a separate holding company for each piece of property Big step is to consult with home country counsel. We are assuming no home country tax problems for the sake of this discussion. Big step is to consult with home country counsel. We are assuming no home country tax problems for the sake of this discussion.

13
The Commercial Portfolio Generally, advisable to partner with an experienced US operator. Generally, advisable to partner with an experienced US operator. We generally see a three layer structure We generally see a three layer structure A Foreign Company A Foreign Company Owning a US Company (here US companies) Owning a US Company (here US companies) US Companies own the real estate US Companies own the real estate

14
Reasons for the Structure Foreign Co – Avoids US Estate Tax – At what may well turn into 55% rates next year Foreign Co – Avoids US Estate Tax – At what may well turn into 55% rates next year US Co - This Avoids a 30% Branch Profits Tax which is imposed on top of the 35% (maybe 25 to 30%) Regular US Tax Rate US Co - This Avoids a 30% Branch Profits Tax which is imposed on top of the 35% (maybe 25 to 30%) Regular US Tax Rate The more than 80% common ownership of each separate company will allow the filing of tax returns on a consolidated basis – so income of one project can be offset by expenses of another The more than 80% common ownership of each separate company will allow the filing of tax returns on a consolidated basis – so income of one project can be offset by expenses of another

15
Funding - Debt or Equity It is generally more tax efficient for US tax to use debt rather than equity It is generally more tax efficient for US tax to use debt rather than equity Interest on debt is deductible against income Interest on debt is deductible against income Interest payments to the foreign holding company are often subject to favorable treaty withholding rates – e.g. the rate is nil under the US Germany tax treaty Interest payments to the foreign holding company are often subject to favorable treaty withholding rates – e.g. the rate is nil under the US Germany tax treaty Note: Local counsel in the home country would have to be consulted on tax effect in home country Note: Local counsel in the home country would have to be consulted on tax effect in home country

16
Beware Earnings Stripping Rules To avoid treatment as dividend the ratio of debt to capital cannot exceed 3:2 To avoid treatment as dividend the ratio of debt to capital cannot exceed 3:2 If it does there will be no deduction allowed for interest If it does there will be no deduction allowed for interest AND the entire payment amount not just the interest element will be subject to withholding – e.g. 50% German owner would have 15% US withholding AND the entire payment amount not just the interest element will be subject to withholding – e.g. 50% German owner would have 15% US withholding

17
The Tax Downside Gains will be taxed at 35% (maybe 25% to 29% under Obama Romney proposals) Gains will be taxed at 35% (maybe 25% to 29% under Obama Romney proposals) Outright ownership would have taxed gain at 15% (maybe 20% under fiscal cliff) Outright ownership would have taxed gain at 15% (maybe 20% under fiscal cliff)

18
Downside Solution – 1031 Exchange Gains can be deferred by swapping into other higher priced “like kind” property Gains can be deferred by swapping into other higher priced “like kind” property This device too can be used to sell shares of the foreign company free of US tax at a higher price on account of the ability of a US buyer to defer recognition of the gain through a 1031 exchange This device too can be used to sell shares of the foreign company free of US tax at a higher price on account of the ability of a US buyer to defer recognition of the gain through a 1031 exchange

19
General Design for the Son We would likely look at having him own the condo outright. Let’s say this condo costs $5 million We would likely look at having him own the condo outright. Let’s say this condo costs $5 million If the property appreciates after his stay here and is sold at a gain then the tax rate is 15% on the gain (perhaps 20%) If the property appreciates after his stay here and is sold at a gain then the tax rate is 15% on the gain (perhaps 20%) The exposure is estate tax (at perhaps 55% rates) if he dies while living in the US but since he is young and healthy with no dangerous hobbies this is not likely. The exposure is estate tax (at perhaps 55% rates) if he dies while living in the US but since he is young and healthy with no dangerous hobbies this is not likely. A 5 year term life policy for a 35 year old male in excellent health for say $2.5 million would cost perhaps $1,250 per year. A 5 year term life policy for a 35 year old male in excellent health for say $2.5 million would cost perhaps $1,250 per year. C.F. If we planned to avoid estate tax (he will likely not be a US resident for estate tax purposes) with say a foreign corporate ownership we would add FIRPTA complications (10% withholding on sale) plus tax at perhaps 25-35% on the gain C.F. If we planned to avoid estate tax (he will likely not be a US resident for estate tax purposes) with say a foreign corporate ownership we would add FIRPTA complications (10% withholding on sale) plus tax at perhaps 25-35% on the gain N.B. We are absolutely assuming away any home country tax issues that this transaction raises. N.B. We are absolutely assuming away any home country tax issues that this transaction raises.

20
Costs of Buying and Selling New York State and City Condo These costs typically are: These costs typically are: A “Mansion” Tax of 1% of the total contract price if the price is $1,000,000 or above. A “Mansion” Tax of 1% of the total contract price if the price is $1,000,000 or above. New York State Real Estate Transfer Tax of $4 per thousand (.4%) New York State Real Estate Transfer Tax of $4 per thousand (.4%) New York City Real Property Transfer Tax of 1% on transfers less than or equal to $500,000, or New York City Real Property Transfer Tax of 1.425% on transfers over $500,000. New York City Real Property Transfer Tax of 1% on transfers less than or equal to $500,000, or New York City Real Property Transfer Tax of 1.425% on transfers over $500,000. Mortgage Recording Tax (if the buyer is obtaining a mortgage loan): Mortgage Recording Tax (if the buyer is obtaining a mortgage loan): Under $500,000: 2.05%, of which.25% is paid by the lender. Under $500,000: 2.05%, of which.25% is paid by the lender. Equal to or greater than $500,000: 2.175% of which.25% is paid by the lender. Equal to or greater than $500,000: 2.175% of which.25% is paid by the lender.

21
Purchasing the Condo – Putting Numbers to the Costs The following is an example of the costs of purchasing a New York City condominium apartment from a sponsor. Assume a $5,000,000 purchase price and a $2,500,000 mortgage. The following is an example of the costs of purchasing a New York City condominium apartment from a sponsor. Assume a $5,000,000 purchase price and a $2,500,000 mortgage. The Schiller son will pay, in addition to the contract price, approximately $204,9823 consisting of the following: The Schiller son will pay, in addition to the contract price, approximately $204,9823 consisting of the following: “Mansion Tax”: $50,912 (payable by all buyers) “Mansion Tax”: $50,912 (payable by all buyers) New York City Real Property Transfer Tax: $72,550 New York City Real Property Transfer Tax: $72,550 New York State Real Estate Transfer Tax: $20,365 New York State Real Estate Transfer Tax: $20,365 Mortgage recording tax: $46,875 Mortgage recording tax: $46,875 Title insurance: $14,280 Title insurance: $14,280 The Schiller son may also be required to pay a contribution to a working capital fund equal to one or two month’s common charges and the sponsor’s attorney’s fees for attending the closing. The Schiller son may also be required to pay a contribution to a working capital fund equal to one or two month’s common charges and the sponsor’s attorney’s fees for attending the closing.